Don’t overdo fiscal correction
Oct 13 2012, 20:14 IST
Political paralysis and excessive debt in the rich world spells a gloomy outlook for the global economy. Overall, the world output is expected to grow by only 3.3% in 2012, compared to 5.1% in 2010. According to the IMF, the inability of the eurozone to integrate further its fiscal and monetary aspects has decreased the confidence of the bond market in sovereign debt of peripheral eurozone economies like Spain and Italy, resulting in a spike in their bond yields. Meanwhile, the polarised politics of Washington, with both Republicans and Democrats unable to reach a compromise, has deferred the outcome of any long-term plan to address the American “fiscal cliff”. This has, amongst other things, instilled doubts in the private sector and contributed to lagging American output and employment growth.
The economic growth in the mostly bouyant emerging markets is expected to, as the IMF notes, hit a “soft landing”, especially for those reliant on foreign demand. The projected growth rates for both India and China are 7.8% and 4.9%, respectively—much lower than the double digit growth of 2 years ago. Besides, a weakened demand in the rich world, bad bank balance sheets (e.g. bad loans in China) and a variety of domestic causes (e.g. infrastructure/ reforms in India) are contributing to the soft-landing.
Also, a series of historical case studies by the IMF suggests some forecasts and remedies for those currently blighted. For instance, the United Kingdom on the gold standard (1918-1938) bears
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